Sunday, September 16, 2012

Contracts - The Words Matter

Everyone in management should spend at least some time in sales as a critical aspect of career development. This Blogger was very lucky because I was asked to assume a Sales job early in my business career. Aside from making a lot more money as a result of the commission opportunity, the real benefit was the knowledge I gained about contracts. The three years I officially spent in Sales, while at Merrill Lynch, provided me a law school education about complex contracts that I use to this day. In fact, whenever we have been involved in complex contract negotiations, I have often been asked if I was an attorney. I guess I learned my lessons well.

Complex contracts evolve over time as a result of issues, or problems that arise in the course of doing business that cause risk or loss to a company. We often think we have heard, or seen it all and then something happens that results in a loss to a company. When that occurs, company's quickly move to address the problem by contractual language so it does not happen again. Sales people, often charged with negotiating contracts on the front line of a deal, never quite get the need for more onerous contract provisions, which they often see as deal killers.

That is why ultimate approval for changes to a standard contract must remain with Senior Management. When commission is involved, a good salesman will give away the store to get the deal done. While flexibility may be necessary to make a deal happen, there is always a line in the sand that cannot be crossed that must be communicated to the client. In many cases, a skilled salesman is negotiating both with the client's attorney and the company's Senior Management to close a deal. This is normal. And, it is never a good idea for the two attorney's to talk directly. The Salesman should always be the intermediary, if possible. Attorney's tend to be deal killers looking for reasons not to do business, rather than reasons to do business.

Contracts are not just about establishing the business relationship. In some ways, that is easy to accomplish. The words governing termination of the contract, the divorce, are equally important and often more difficult to negotiate. Just as some marriages don't work out, some business deals don't work out either. Years ago, we were involved in a sizable joint venture with a very well known company. The contract term was for ten years, carrying with it substantial penalties, if we pulled out of the deal sooner.

Given my contract experience, I asked all the "what if" questions. What if their service was poor? What if their image suffered in the marketplace? What if they were acquired by another company, or a competitor of ours? What if they filed for bankruptcy? This was a very large company and an industry leader. As such, to all my questions, they said "ridiculous" and that these things could never happen.

Of course, my response, after 6 months of contract negotiations, was simple. If these things were so "ridiculous" and they could never happen, then they surely would not abject to having my divorce/termination provisions to cover these issues, without penalty, in the contract. On that basis, they agreed to include my mandatory provisions. Guess what? Within 4 years of executing this contract, when the financial melt down occurred in 2008, all of these things happened and more. When we terminated the contract, they reminded us of the penalty provision to which we said they needed to reread the contract. In fact, because we saw the potential train coming, we were able to end our agreement without any penalty. The lesson here is that a potential divorce is just as important as the original deal.

Specific to contracts, Words Matter. Contracts exist so that when problems occur during the course of providing services or goods, the words are there to cover the issues, hopefully without the need to cancel the contract. The goal is to continue doing business on a mutually advantageous basis. If and when that ceases to occur, it is time to end the business relationship, if possible, on friendly terms that are the basis for contract termination.